PARDEEP MERCANTILE COMPANY PVT. LTD. (NOW KNOWN AS DEVAKAR INVESTMENT & TRADING CO. P. LTD.),LUDHIANA vs. DCIT, C-1, LUDHIANA

आदेश/Order

PerSudhanshuSrivastava, Judicial Member:

This appeal is preferred by the assessee against order dated

22.08.2017 passed by the Ld. Commissioner of Income Tax

(Appeals), [hereinafter called the CIT(A)] for assessment year

2012-13 and the sole issue for consideration before us is the

confirmation of disallowance of Rs. 4,02,747/- in terms of section

14A of the Income Tax Act,1961 (hereinafter called ‘the Act’) read

2 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana with Rule 8D(2)(iii) of the Income Tax Rules,1962 (hereinafter

called ‘the Rules’).

2.0 The brief facts of the case are that the assessee is engaged

in the business of derivatives. The return of income was filed

declaring income of Rs. 2,98,83,170/-. After processing of the

return, the case was selected for scrutiny under CASS guidelines.

During the course of assessment proceedings, the Assessing

Officer (AO) noted that the assessee company has made

investments in shares and mutual funds amounting to Rs.

7,48,72,437/- and had earned dividend income to the tune of Rs.

6,25,920/-. The assessee was asked to show cause by the AO as

to why not disallowance under section 14A of the Act be made in

respect of the expenditure incurred for earning exempt income in

terms of the provisions of Rule 8D of the Rules. In reply to the

said show cause notice, the assessee’s response was that during

the year under consideration the assessee had earned taxable

income of Rs. 3,21,92,636/- and exempt income of Rs.

6,25,920/- and that the assessee had suo moto allocated an

amount of Rs. 20,435/- under section 14A of the Act out of the

total expenses of Rs. 10,71,443/- on proportionate basis on

account of expenditure incurred in earning dividend income.

3 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana However, the AO did not accept the submissions of the assessee

and proceeded to compute the total disallowance under section

14A at Rs. 11,49,903/- and completed the assessment at Rs.

3,10,12,638/-.

2.1 Aggrieved, the assessee approached the Ld. First Appellate

Authority challenging the disallowance and the Ld. CIT (A)

directed the AO to account for only those investments which had

yielded exempt income during the year for the purpose of

computation of the impugned disallowance. Thus, the Ld. CIT (A)

directed that Amended Rule 8D, which came into effect from

02.06.2016, should be applied in case of the assessee which

resulted in an enhancement of the disallowance.

2.2 Now, the assessee has approached this Tribunal and

challenged the impugned order by raising the following Grounds

of appeal:

4 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana 3. That the Ld. CIT (A) erred in law and on facts in enhancing the disallowance made by assessing officer under Rule 8D(2)(iii) by Rs.4,092,747/- by applying amended Rule 8D and thus by making total disallowance under Rule 8D(2) of Rs.8,05,494/- (Rs.4,02,747/- + Rs.4,02,747/-).

AR’) submitted that during the year under consideration, the

assessee had earned dividend to the tune of Rs. 6,25,920/- but

fresh investments made during the year were nil. It was further

pointed out that the Reserves and Surplus as on 31.03.2012

were to the tune of Rs. 10.91 crores whereas the total

investments as on that date stood at Rs. 7.28 crores. It was

submitted that, thus, the total investments of the assessee were

covered by the Reserves and Surplus of the assessee. It is was

further submitted that the assessee has allocated expenses

between taxable income and exempt dividend income in a

propionate manner and that on identical facts, in the case of

Devakar Investments and Trading Company Limited (with which

the assessee-company has now merged), the Chandigarh Bench

of the ITAT in ITA No. 691/Chd/2016, vide order dated

5 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana 24.04.2018, had held that since the assessee had disallowed

expenses in proportion of the dividend income to the total

income, the order of the Ld. CIT (A) ordering to delete the

disallowance made by the AO was to be upheld. It was further

submitted that a similar view had been taken vide ITAT

Chandigarh Bench in the case of the sister concern of the

assessee namely Vardhman Acrylics Limited in assessment year

2013-14 in ITA No.88/Chd/2018 vide order dated 03.07.2019. It

was further submitted that in this order, it had further been held

by the ITAT that application of Amended Rule 8D was to be

prospective in nature and was to take effect from 02.06.2016 only

and that the same could not have been applied for assessment

year 2013-14. The Ld. AR submitted, therefore, the direction of

the Ld. CIT (A) that the AO should apply the provisions of

Amended Rule 8D was not legally sustainable. The Ld. AR also

placed reliance on another order of the ITAT Chandigarh Bench

in the case of Vardhman Holdings Limited in ITA

No.550/Chd/2015 wherein, vide order dated 04.09.2015, the

ITAT Chandigarh Bench had held that where the AO had created

a situation where no expenditure was allowed as deduction to the

assessee against taxable income in the garb of computing

6 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana disallowance under section 14A, such disallowance was totally

bad in law and the Ld. CIT (A) had rightly deleted the

disallowance.

4.0 Per Contra, the Ld. Sr. DR vehemently supported the order

of the AO and the Ld. First Appellate Authority and argued that

the suo moto disallowance of Rs.20,453/- was not sufficient

disallowance in as much as the assessee-company was having

common funds for the purpose of the investments as well as for

the business purposes.

5.0 We have hearing rival submissions and have also perused

the material on record as well as the various orders of the ITAT

which have been relied upon by the Ld. AR in support of his

contentions. As far as the question of Amendment to Rule 8D

being prospective in nature is concerned, the Chandigarh Bench

of the ITAT in the case of the sister concern of the assessee i.e.

Vardhman Acrylics Limited Vs. ACIT (supra) has held that as far

as the application of the substituted provision of Rule 8D w.e.f.

02.06.2016 was concerned, the issue is settled by the judgment

of the Hon'ble Apex Court in the case of CIT Vs. Essar

Teleholding Ltd. reported in (2018) 90 Taxman.cim 2(SC) wherein

it was held by the Hon'ble Apex Court that the Amended Rule 8D

7 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana of the Income Tax Rules was applicable prospectively. Therefore,

in view of the judgment of the Hon'ble Apex Court in the case of

CIT Vs. Essar Teleholding Ltd. (supra), we hold that the Ld.

CIT(A) was not justified in directing the AO to apply the

provisions of amended Rule 8D.

5.1 As far as the issue of application of Rule 8D vis-à-vis the

provisions existing that particular time i.e. assessment year

2012-13 is concerned, it is seen that the assessee has already

made suo moto disallowance in terms of the provisions of section

14A which is undisputedly in proportion to the dividend income

earned. It is also a case in point that the assessee has not made

any fresh investments during the year under consideration and

still further the AO has also not given any cogent reason for not

accepting the suo moto disallowance made by the assessee and

has simply mentioned in the assessment order the onus was on

the assessee to prove that it had not incurred any expenditure to

earn exempt income. The AO has observed that as per the

provisions of Rule 8D, if the AO is not satisfied with the

correctness of claim of expenditure made by the assessee or the

claim by the assessee that no expenditure has been incurred, the

AO shall apply provisions of rule 8D(2). After that, the AO has

8 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana proceeded to make a further disallowance without recording the

reason as to why he was dissatisfied with the assessee’s suo moto

disallowance. We are of the considered opinion that the action of

the AO of recording the so called satisfaction was, thus, lacking

any logic or sound reasoning and, therefore, he had no basis to

make any further disallowance in the present case. The Ld. CIT

(A) has also upheld the disallowance without appreciating this

aspect of the case.

5.2 Therefore, for reasons as stated in the preceding

paragraphs, we are unable to concur with the findings of the

lower authorities and we set-aside the order of the Ld. CIT (A) and

direct the AO to delete the impugned disallowance.

6.0 In the final result the appeal of the assessee stands allowed.

Order pronounced on 22.08.2022.

Sd/- Sd/- ( N.K. SAINI) (SUDHANSHU SRIVASTAVA) Judicial Member Vice President Dated : 22.08.2022 “आर.के.” आदेशक���त+ल,पअ-े,षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकरआयु.त/ CIT

9 1513-Chd-2017 (A.Y. 2012-13) – Pardeep Mercasntile Company Pvt Ltd, Ludhiana 4. आयकरआयु.त (अपील)/ The CIT(A) 5. ,वभागीय��त�न1ध, आयकरअपील$यआ1धकरण, च3डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड�फाईल/ Guard File

आदेशानुसार/ By order, सहायकपंजीकार/ Assistant Registrar